Wall Street life: Those money-mad rocket scientists will be back, but at different desks

By David Litterick

12:01AM BST 18 Aug 2007

Everyone's looking for someone to blame. It's no great surprise. When you've lost more money in the markets than the GDP of a small country, it's only natural to lash out at something other than your own dismal trading strategy.

For a time, the favourite culprit was Alan Greenspan - he of the insanely low interest rates that prompted traders to borrow more money than the GDP of a large country to bet with.

Then the mantle of value destroyer fell to the credit ratings agencies, whose credibility skates on very thin ice now they appear to have known about as much about what was going on in the sub-prime market as the rest of us.

Blindsided is the word. Like a deer caught in the headlights of juggernaut heading downhill fast, they stood motionless as the truck piled straight into them.

But after the past couple of weeks, I reckon the new doorstep at which to lay the blame belongs to the rocket scientists.

Them, and every other nuclear physicist or maths whiz-kid who took their umpteen PhDs in incredibly hard sums and instead of searching for the answer to life, the universe and everything, decided to pocket a shed-load of cash.

While Stephen Hawking was hypothesising on the very nature of existence, and that Israeli chap was working out how to build a time machine, there were the scientists who decided the best use of their expensive education was to compile computer models on how to get incredibly rich. For years, the quants sat in dusty back rooms, eschewing the limelight enjoyed by the noisy traders and crunching the numbers to refine their programmes to perfection.

Only one problem. They didn't work.

As the market went pear-shaped, so did their exquisitely-honed models and delicate algorithms. Prices that should have gone down went up, while those that should have risen sank like stones. And they weren't ready. Perhaps they never learned the rest of that popular phrase. History does indeed repeat itself - but the ending is never the same.

Maybe we shouldn't be surprised. Anyone who's seen 2001: A Space Odyssey, or James Cameron's Terminator movies, knows that the machines will always run amok in the end. And that's really not rocket science.

Many were caught out by the CDOs, the CMOs, the ABSs and any number of acronyms sent to spook the markets.

So the burned investors sceptical of Collateralised Loan Obligations and the rest of those complex, highly leveraged investment products would have been suitably cautious about one email which popped into Wall Street inboxes this week.

The message announced the arrival of a brand-new product perfectly tailored for making money in today's jittery markets. The name was a bit of a mouthful, though.

Quick-thinking readers will have spotted the joke already, of course. The acronym for such a product? Colostomy Bags.

The email goes on: "Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SHIT, and are leveraged an infinite amount of times through the innovative use of derivatives."

The email is, of course, a joke - although one wouldn't put it past some bright spark to try to market it. The nuclear physicists are probably inserting it into their models as we speak.

The author of the email has yet to be unmasked, but for offering at least a measure of amusement in this most dismal of weeks, Wall Street thanks you.

There have been other jokes out there this week, although nothing quite so intentional. Sentinel Management Group caused the largest guffaws when it asked the Commodity Futures Trading Commission to allow it to stop redemptions.

In a letter to clients, Sentinel said: "We had previously thought that the market would return to some semblance of order and that our clients would not join the panic. Unfortunately, this has not been the case."

Talk about whistling in the dark. "We had previously thought that our clients really wouldn't mind losing their shirts" is what they were really thinking. "Unfortunately things did not work out in the way we'd been crossing our fingers and hoping they would."

Any trader crossing their fingers for more record payouts come bonus season this year may now find that's not going to work out for them, either.

"It would not be surprising, should the market continue to correct, that come December people will be surprised by the paucity of their bonuses next year," said Harlan Platt, a business professor at Northeast University who has written books about corporate meltdowns.

"And a goodly number may find themselves looking for work elsewhere." Those now facing the prospect of retiring on a smidgen of what they'd put into the markets will be thinking it couldn't happen to a nicer bunch, of course.